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Agri-commodities update: Greenback untrumped

The US Dollar continued its recent rally to end above, or near, recent highs against the other agri-exporter currencies.

Currencies

The US Dollar surged against many of the other agri-exporter currencies on Tuesday.  The greenback is consequently either making, or closing in on, the highest level in a couple of months.  These levels are enough to put a headwind on US$ prices, or perhaps see local prices marked higher.  The Australian Dollar has fallen more than a half-cent to start today a little under 75½¢.

Grains & Oilseeds

  • Wheat futures prices were little changed Tuesday in dull trading.  Chicago was the only market to show signs of life.  Chicago December continued to creep higher to mean it closed near recent highs.  The contract has not lingered for long at these levels over the past four or five weeks.  Yet perhaps we are about to test that resistance?  We can easily be persuaded that there is plenty of physical selling at higher levels.  Our question though is based on the large short position held by investors in Chicago wheat.  Chicago wheat has essentially traded sideways for a more than a month now.  Any downward momentum will have dwindled and that will be sufficient for some investors exit, perhaps on a large enough scale to work through that physical selling.  The stronger US Dollar though stands as a potential headwind.  Weather forecasters expect rain to move into southern Russia and western Kazakhstan from today.  We will assess next week whether these regions can be taken off the watchlist.  Western regions of US hard red winter wheat country remain on the watchlist.  Weather forecasters continue to think that doesn’t look likely to change in the next week or so.  Temperatures remain warm enough for now that crops will be able to use any rain that does arrive.
  • ASX East January wheat futures were marked almost $2 lower on Tuesday to close just over 237$.  That mark-down, along with a sympathetic move in the currency means, Australian basis has slid about five dollars or so.  The slide is probably not enough to excite export interest.  Weather forecasters expect the better turn in the weather to persist in eastern grain regions.  While not free of rain, drier periods and expected temperatures will allow soils to make some progress on drying.
  • Corn futures were a shade higher Tuesday.  The USDA announced a large flash sale of US corn, which appears to have sparked the initial move higher.  Investor short-covering ahead of tonight’s WASDE was also supportive.  Last week’s drier weather has helped fieldwork get back on track.  The US corn harvest is currently around 35% complete.  Forecasters though say that the harvest pace is likely to slow down again because they now expect more rain in the Midwest.  Brazil’s corn planting is progressing at a good clip, but central regions are still disfavoured for any significant rainfall.  Warmer temperatures will accelerate the drying impact on already marginal-to-dry soil conditions.
  • Soybean prices were little changed in a dull day’s trading.  The market’s bearish supply expectations heading into tonight’s WASDE update should help to cushion the blow of any further upgrades to US yields.  Last week’s drier weather saw fieldwork advance rapidly – the US harvest jumped 18 percentage points, to 44% complete.  The harvest though is still lagging the average pace and weather forecasters expect some disruption from periodic bouts of rain in the Midwest over the next week.  Central Brazil is likely to continue trending too dry, while Argentina should see soil moisture increase to promote better planting and establishment conditions.  Canola futures took a material step higher on Tuesday and are pushing up against near-term highs.  The final stage of the Canadian harvest is still contending with soggy conditions and cool temperatures (which slow drying rates).  Conditions in eastern Australia have improved and are forecast to remain favourable for the next week or so.

Cotton

US cotton futures had another day of sideways trading.  The December-March spread tightened a shade, but remains not far off recent lows.  Investors are very long and the trade was equally as happy to sell into the mid-September rally.  Those huge positions, on both sides, look somewhat extreme against a backdrop of still relatively moderate price levels.  It of course possible that some fundamental shift occurs to “re-validate” the rationale for these positions – but only one at a time.  The other is then likely to want to exit and is unlikely to be able to do so without causing significant upset to pricing.  In the US, around 22% of the cotton crop has been harvested – a couple of points ahead of the average pace.  Analysts are expecting only minor adjustments to the US and global balance sheets in tonight’s WASDE update, though that does not take into account the impact of Hurricane Matthew in the US southeast.  The level of damage remains an unknown.  South Carolina’s Department of Agriculture though issued a statement saying early estimates indicate a “significant” loss of cotton.

Sugar

Sugar futures prices were a shade higher on Tuesday.  The swells of trading volume were larger on Tuesday with a notable dip in prices down near recent lows was followed by a very sharp recovery later in the day.  Down by the stairs, up by the elevator!  The March-May spread largely followed that pattern.  Market chatter suggests that a problematic October contract was, somehow, behind the buying surge.  Nevertheless, the market ended as it started – bogged down in the middle of its recent range.  2017 and 2018 prices are similarly little changed.

Cattle

Australian spot cattle indicators were mostly weaker on Tuesday.  The EYCI has eased again as physical offerings bounce back from two weeks of rain restricted supply.  The US cattle market’s latest slump had another leg down – live cattle futures fell to six-year lows on Tuesday.  Last week’s brief rally was built on hopes that very low prices would stoke better end-user demand for beef.  The subsequent collapse this week suggests that demand is currently very price elastic.  Heavy protein supplies in the US means that end-users can afford to be fickle.  Dispirited investors spent Tuesday liquidating their long positions as the near-term supply and price outlook remains bleak. 

Dairy

NZX WMP futures prices were a tad higher if anything on Tuesday.  Again much of that was in the mid-2017 contracts where fluky liquidity means we will not read much into it.  The NZ Dollar has again fallen sharply to now trade near 10-week lows this morning, as is the Euro.  The moves mean the two major dairy exporters are, coincidentally, being held pari passu in competitive terms by these currency swings. 

Learn More

For a more detailed snapshot of market conditions, or to get the daily market update direct to your inbox daily, visit Commonwealth Bank.

Important Disclosures and analyst certifications regarding subject companies are at www.commbank.com.au/corporate/research. This report was originally published, approved and distributed by Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945.

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